FCA puts Private Markets Firms’ Anti-Money Laundering and Financial Crime Controls under the spotlight

June 13, 2019 by ACA Compliance Group

In late April, the Financial Crime Specialist Supervision Team (“FCSST”) of the FCA contacted a wide variety of firms (Consumer Credit, Insurance and most interestingly Private Equity) to assess how these firms have implemented financial crime regulations. These assessments resulted in on-site visits by the regulator, some of which have already been undertaken. All firms contacted were smaller FCA-regulated businesses, indicating that the regulator may be moving into a previously under-examined market segment.

Why are these visits taking place?

The FCSST supervises other teams within the FCA as part of their Assurance Programme with responsibility for financial crime. Whilst these assessments do not constitute a thematic review, it is clear they represent a continued focus from the FCA in combatting financial criminals and their use of the UK as clearing ground for illegally acquired funds. Just days before commencing these assessments, the FCA published its Business Plan 2019/20 which again identified financial crime as a top priority for both the regulator and the UK government alike. This emphasises the FCA’s commitment to improving the breadth and depth of their anti-money laundering supervision capabilities, including more intrusive assessments of the effectiveness of firms’ systems and controls.

What areas are the FCA focusing on?

Given the tone of the business plan with regards to financial crime, and a reiteration of its focus on firm governance and culture, it is no surprise that the assessments by the FCSST focussed on 6 areas covering: Governance and Management Information, Policies and Procedures, Risk Assessments, Identification of High Risk or Sanctioned Individuals or Entities, Due Diligence and Ongoing Monitoring, and finally Communication, Training and Awareness.

If the indications from the documents requested by the FCSST, and the interviews that took place during the onsite portion of the assessment, are anything to go by, it is clear the FCA is following through on its intent to be more intrusive. Document requests included MLRO reports to the firm’s governing body, and any internal or external reports covering Anti-Money Laundering (AML) or Sanctions, including auditors, for the past three years.

What does this tell us about the FCA’s priorities?

Given this scrutiny, and based upon the initial feedback provided by the FCSST at the conclusion of the on-site visits, the FCA are clearly prioritising that firms ensure that their AML policies and procedures are up to date and that sanctions screening is performed with appropriate frequency, according to a robust methodology. Assessment of politically exposed persons (so called “PEPs”) must also be rigorous and the addition of domestic PEPs, introduced in 2017 via the 4th Anti-money Laundering directive, also be included. Where these checks are outsourced to a third party, be it a service provider or legal counsel in the case of transactional AML checks, firms should ensure that evidence is provided that all sanctions and PEP checks have been performed and no flags raised.

What are the implications for private market firms?

Private market clients will also be interested to know that the FCSST have examined how risks are monitored by Firms, not only in the investor base but importantly also in portfolio companies (“portcos”). Initial indications are that a certain degree of involvement with portcos, such as board seats or observer roles, provide comfort to the FCA that AML risks are being monitored but it remains to be seen if a more granular assessment by firms of their portcos anti-financial crime policies and procedures would be suggested.

We expect that further guidance will be provided by the FCA following the issuance of the final assessment letters by the FCSST (due 6-8 weeks post visit). At this time, other than high level findings, the FCA is simply rating firms as either “adequate” or “inadequate” in relation to their systems, policies and procedures (including culture) for a firm of their size and risk profile.

What should firms do next?

We would advise our clients to review the appropriateness of their policies and procedures on anti-money laundering and financial crime and how sanctions/PEP checks are performed. A check on the firm-wide Financial Crime Risk Assessment should also be a priority. We recommend that this is performed at least annually but must also take into consideration any changes in investment strategy, including asset classes or jurisdictions.

How ACA Can Help

ACA has considerable experience in the private markets sector and can be appointed to perform an independent assurance review of your firm’s anti-money laundering policies, procedures, systems and controls. This may take the form of a sample file review of investor types and/or transactions against the applicable regulatory requirements and industry best practices or a more detailed review whereby we can mimic the type of calls and visits being undertaken by the FCA.

For More Information

Should you have any questions related to the above, or wish to enquire further about these services, please contact Andrew Poole, Andrew Welch or your usual compliance consultant on +44 (0)20 7042 0560.